Department of Labor Issued Final Revisions to the Definition of a Plan Participant for Form 5500

At a glance 

• The main takeaway: At last, the Department of Labor has issued the final revisions to Form 5500 Annual Return/Report of Employee Benefit Plan. The new instructions, effective for 2023 filings, will focus on enhanced reporting and require additional compliance and detail for plan expenses on Schedule H.
• Impact on your business: While the updated definition is welcomed news for many employers to avoid the IQPA requirement, it does not mean they get a free pass. Employers should increase their efforts to monitor their plan operations.
• Next steps:  Aprio’s Employee Benefit Plan Audit Services team can help you navigate the new rules for plan participants to ensure your plan continues to operate properly.

Schedule a consultation with an Aprio Advisor today.

The full story:

After being in the works for several years, the Department of Labor has issued the final instructions for Form 5500 Annual Return/Report of Employee Benefit Plan, effective for 2023 filings. Many of the revisions are final versions of changes originally outlined in the Secure Act of 2019. These revisions focus on:

• Enhanced reporting requirements for groups of employer sponsored plans, including Multiple Employer Plans (MEPs), Pooled Employer Plans (PEPs) and Defined Contribution Groups (DCGs).
• Additional compliance questions and detail for plan expenses on Schedule H.

Also, the changes provide details on how a “plan participant” is defined for large plan versus small plan filers. Whether a plan falls into the small plan, or the large plan category has significant filing consequences.

Large plan versus small plan

In general, a plan that has more than 100 plan participants (the 80/120 rule allows employers who filed as a small plan in the previous year to use 120 participants as the threshold) on the first day of the plan year, is deemed to be a large plan which now carries the enhanced 5500 filing requirements. A longer version of the form that includes the additional schedules must be completed.

A Schedule H requires attaching an Independent Qualified Public Accountant Report (IQPA) form, which includes an accountant’s opinion and financial statement with accompanying financial statement notes and supplemental schedules. Prior to the new definition, a participant included any employee that met the plan’s eligibility requirements and any former employee that had an account balance in the plan. 

As large plan sponsors can attest, the annual IQPA process is no small undertaking. It requires significant time and effort on the employer’s internal resources and can be costly. Furthermore, it can be particularly frustrating for employers who are subject to the IQPA requirement due to a large number of employees that meet the eligibility requirements, but who ultimately have a very small number that actually participate. For those employers, the IQPA can be a legitimate burden whose cost is hard to justify given the few who benefit from the plan. Simply put, it has been difficult for these employers to accept being deemed a large plan when so few, current, or former employees, actually have money in the plan.

New rules for plan participants

Effective January 1, 2023, the definition of a plan participant has changed. It now only includes current and former employees with an actual account balance. Employees that meet the plan’s eligibility requirements, but do not participate, are excluded from the definition. This will allow certain employer’s to be deemed small plan filers for 2023 and avoid the IQPA requirement after being subject to the requirement through 2022. It remains to be seen just how many plans will be impacted by this change given the overall push to get as many employees to participate through policy initiatives that promote global auto-enrollment. Such initiatives result in an increase of participants actually participating and therefore being included in the definition of a participant.

The bottom line

The updated definition of a plan participant is welcomed news for many employers as they can now avoid the IQPA requirement. However, the IQPA provides a crucial review of plan operations for these very same employers because they often do not have robust policies and procedures in place. These employers should use this opportunity to increase their efforts to monitor plan operations. The fact that they no longer have to endure the annual IQPA does not mean they get a free pass. It is just the opposite. Now more than ever, they must rely on their internal operations and outside advisors to ensure the plan is operated properly without the safety of the plan auditors visiting every summer. Aprio’s Business Tax Services team can help you navigate the new rules for plan participants to ensure your company remains in compliance.

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